Is it logic or ego that drives the urge to merge?
On Jan Leschly's ego, why it pays to own `Slate' magazine, and the curse of Alastair Morton
Saturday 24 January 1998
None the less, until quite recently the global mega-corporation has been confined to a relatively small number of industries - oil and automobiles being the obvious examples. Not so any longer. With globalisation has come pressure for consolidation to create a small number of dominant world players across a whole range of other businesses. Virtually no industry is immune to it.
The latest example is this week's disclosure of merger talks between SmithKline Beecham and American Home Products to create a new pharmaceuticals and health-care products goliath on a par with the world's largest, Merck of the US. The industrial logic of these things is as a rule hard to fault; increased size brings competitive advantage across a battery of different costs. With size also comes greater marketing clout and, in the case of pharmaceuticals, enhanced research and development spending, which increases the company's chances of discovery.
All the same, is it not as much ego, management aggrandisement and empire building as industrial and commercial logic which is driving the urge to merge? In this particular case, that seems a real possibility. Jan Leschly, chief executive of SmithKline Beecham, is a restless go-getter, filled with energy and ambition and he's intent on becoming the world's number one player in his field.
American Home Products undoubtedly has a succession problem which Mr Leschly could equally undoubtedly solve, but AHP is also a very different sort of company. The consistent earnings growth it has managed to deliver over the years is a result not of organic growth, as with most health- care companies, but of acquisition and a rigid, centralised attention to costs.
In the 1950s, AHP was the biggest company of its type in the world, but then a gentle process of erosion began to set in. Successive attempts at reversing it through acquisition have failed to correct the problem. With SmithKline Beecham, AHP sees the possibility of a fresh transfusion of high red corpuscle blood. The two purposes - AHP's need for new blood and Mr Leschly's ambition to be number one - seem to dovetail neatly but are these really the sort of motives to produce a world-beater. Mr Leschly is just as likely to end up with a case of transplant rejection as the athletic super-champion he wants.
One of those wonderfully obscure professorial squabbles has broken out in the world of American academia over who deserves credit for a particular economic theory - in this instance the theory of "increasing returns". The row carries more than usual significance since the idea of increasing returns, and the closely related concept of "network externalities", forms the theoretical basis of the US Justice Department's anti-trust case against Microsoft.
It was reported recently in the New Yorker magazine that the idea came originally from one Brian Arthur, a little-known Stanford economist. For years, the New Yorker claimed, Mr Arthur struggled to get his views heard; because the theory seemed to conflict with the mainstream US view that free markets are always self-correcting, he became a pariah, his views were obstinately opposed and he spent much of his career in the wilderness.
Baloney, says Paul Krugman, professor of economics at MIT, in the latest edition of Slate, a virtual magazine published over the internet. In fact the idea of increasing returns is as old as the hills, with a long academic history in which - surprise - Mr Krugman plays a part. According to Mr Krugman, it is nonsense to argue, as the New Yorker does, that Mr Arthur's work was so revolutionary that he was shut out of the academic establishment.
Of the two accounts, Mr Krugman's seems the more believable; the idea of increasing returns, like a lot of economics, is in the end just common sense. It is incredible that such a powerful concept was not in any way researched or explored before Mr Arthur stumbled across it. The theory adds up to simply this: goods become cheaper the more of them you produce. Furthermore, some products, like fax machines or telephones, become more useful the more people who use them. Well there's a thing.
The reason the theory is important in the Bill Gates case is that Microsoft seems to be an example of how this process might allow companies operating at the forefront of technology to establish a monopoly to the detriment of the consumer and technological advance. The more people who use Microsoft's PC operating systems, the more everyone else has to. Microsoft has cleverly used this snowball effect to become the industry standard. You have to use Microsoft to be fully compatible with everyone else, even though there might be better and cheaper alternatives in prospect. The free market is not meant to operate in that way, but plainly it can do if left to its own devices.
But hold on a moment. Mr Krugman's complaint seems to go beyond that of plagiarism. The fact that the New Yorker has got it wrong about Mr Arthur's copyright, he suggests, rather undermines the whole article, which like a lot of what's written about Mr Gates these days, was broadly anti-Microsoft.
Indeed, the very theory of increasing returns is a contentious one, Mr Krugman argues. When Mr Arthur began peddling the concept "he seemed unaware of the conceptual difficulties that had led economists not to ignore but to downplay the idea". So there you are; the theory is disreputable anyway and as a result might be doing real harm by discrediting good economics and promoting dubious policies.
All this must be music to the ears of Bill Gates, who is a big fan of Slate, which curiously for someone so computer-literate, he downloads on to paper before reading. But then this is hardly surprising, for Mr Gates owns Slate magazine. It costs him about $10m a year to push out over the net. Cheap at the price, you might say.
I was intrigued to learn that John Prescott, the Transport Secretary, has hired Sir Alastair Morton, former co-chairman of Eurotunnel, as a consultant to advise on how to get the Channel Tunnel high speed rail link built without digging even deeper into the public purse than the Government already is. Sir Alastair is certainly well qualified for the role; against all the odds, he got the Channel Tunnel built, and without costing the taxpayer a penny.
Regrettably, Sir Alastair's legendary talent for persuading the City and the international banking community to part with huge amounts of money for uneconomic endeavours could prove a handicap. Obviously he knows all the tricks. But by the same token it would be naive to think the City hasn't learned from the Eurotunnel experience. No banker, it is said only half in jest, will these days meet with Sir Alastair without checking his wallet afterwards. His association with the rail link could well prove the final coup de grace for this troubled project.
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